Shares of Voltas Ltd and Blue Star Ltd have rallied on the back of strong sales of air conditioners (ACs). As industry sales spiralled 33% year-on-year in the first six months of FY20, these firms gained by way of robust growth in revenue and profitability.
However, with a plethora of incumbents planning to cash in on the growing AC market, competition is set to intensify. Media reports say Samsung India is planning an aggressive strategy to regain its market share, which has fallen from 10% in FY14 to 4% currently. Given its deep pockets, the company plans to enhance its distribution network, product range and increase sales, if need be, with disruptive pricing.
“This would compel others to cut prices perhaps in the forthcoming months. Blue Star and Lloyd have cut prices for 1.5 tonne 3-star fixed-speed AC by 5% and 3%, respectively, in December,” pointed out a report by Emkay Global Financial Services Ltd.
Besides, dealers say that Daikin and Hitachi, which were so far popular in the premium AC market, are trying to enhance reach through new mid-range products and variants.
Then, there is competition from online e-commerce platforms where the price is 12-15% lower than retail stores.
The moot question is: Will Voltas’s and Blue Star’s market share continue to grow amid such intensifying competition? Will pricing by competition lead to margin pressure?
Analysts at Motilal Oswal Financial Services Ltd are confident that Voltas won’t lose significant market share, “given its pricing strategy, strong procurement and distribution network”. Gains for Samsung could come from the share of fringe AC brands.
To be sure, in the listed universe, Voltas bites off the largest share of around 25% of the room AC market, with Blue Star slowly inching up from its 12.5% share. Analysts do worry over margin expansion, which may be capped due to stiff competition.
While the air conditioning business comprises a third of the total revenue, both firms’ presence in large urban infrastructure and commercial projects brings hope of a better year ahead. Indeed, the industry lagged investor expectation in 2019 due to weak macroeconomic factors, both in India and overseas.
However, enquiries from hospitals and educational institutions, along with an order book of about 1.5 times the annual revenue, foretell better times for the electro-mechanical projects segment. But the risk of weak private sector investment, delays in projects and stretched working capital remain.
While the next three months could see strong revenue increase in the AC segment, consumer demand and reaction to the marketing blitzkrieg of a plethora of brands will determine profitability and earnings ramp-up in FY21.―Livemint